Pensions to be included in the inheritance tax calculation
15th January 2025
More farmers are seeking advice on their pension pots following changes announced at the Budget, which will bring unspent pensions and death benefits within the scope of inheritance tax from April 2027 – making it more difficult for farmers to pass on wealth to the next generation.
Many farmers use pensions as a way of passing on wealth, as currently money left in pensions on death is normally free of inheritance tax. This will change from April 2027 when unspent pensions and death benefits will be included in the inheritance tax calculation, NFU Mutual has explained.
The income tax treatment of pension death benefits is set to remain unchanged. Currently, if someone dies before the age of 75, then the family can take income and lump sums (within limits) from their remaining pension funds free of income tax.
If someone dies after the age of 75, the family pays income tax on any money they take out.
This could mean that someone dying after age 75 with a fund of £100,000 could see a £40,000 inheritance tax charge, the remaining £60,000 would then be subject to income tax of up to 45 percent leaving only £33,000 of the original amount.
Major concerns for farming families
Sean McCann, chartered financial planner at NFU Mutual, said: ‘’The proposed changes to agricultural and business property relief have caused major concerns for farming families. When planning, it’s also important to factor in the change to the inheritance tax treatment of pensions, which can make a significant difference to the tax bill faced by families.
“Pensions will remain free of inheritance tax until April 2027, which gives a breathing space for those impacted to consider their options. As we approach that date, it will make sense for those aged over 75 to take any available tax-free lump sum to ensure it isn’t exposed to both income tax and inheritance tax.
“Post April 2027, it’s likely we’ll see more people taking income from their pension and making regular gifts to take advantage of the ‘gifts from normal expenditure’ exemption, which allows you to make regular gifts from income, immediately free of inheritance tax, provided you’re left with enough income to maintain your normal standard of living.
“There is no upper limit on this exemption, which can provide flexibility when it comes to planning.
“It’s also likely we’ll see more lump sums being taken from pensions and gifted to loved ones, which if made more than seven years before death, will be free of inheritance tax.
“Many will seek to protect the potential liability with a seven-year life insurance policy, which if put into trust, will provide a tax-free lump sum to meet any inheritance tax liability on the gift.”
Raise in farmers using pensions to save for future
Currently, most pension death benefits can be paid out on receipt of a death certificate.
The government is proposing that from April 2027 pension providers will become liable for reporting and paying any inheritance tax due on unused pensions to HMRC, which is likely to delay payment to the family. The consultation on how this will work in practice is due to close in late January.
In recent years the proportion of farmers and farm workers using pensions to save for later life has risen, according to figures from the Office of National Statistics (ONS).
Employees with workplace pensions in agriculture have risen from 16.6 percent in 2012 to 64.3 per cent in 2021, according to figures from the ONS. Across the UK, the proportion of all employees with workplace pensions has risen from 47 percent to 79 percent in the same period.
This rise follows the introduction of automatic enrolment in 2012, which made it a legal requirement for all employers, including farmers, to offer a pension to eligible employees.
Read more political news.
